This Is How You Take Charge of Your Credit Score

This Is How You Take Charge of Your Credit Score
by Kate Lyons
October 04, 2016
For our series, Money Talks, we’ve partnered with Kate Lyons of Holberg Financial to answer all the tricky questions about budgets, salaries, 401ks, 403bs...well, you get the idea. Today, we talk credit scores.
Credit? Like...extra credit?
You know terms like "credit score" and "credit report," but do you know what they mean or why they’re important? For better or for worse, this is one of the most important numbers you’ll ever have in your life and getting it right can be worth more than you might think. Getting it wrong however, can have drastic implications. Chief among them is the study done by the Annie E. Casey Foundation that showed that the lifetime cost of having a bad credit score compared to a good score on average amounted to an astounding $250,000—this shows up over time as you pay more in interest and fees on your various debt.
We want that quarter of a million dollars to stay in your pocket (although you might need some bigger pockets) and the tips and tricks of building and managing a great credit score are yours for keeps (like pogs on the playground for all the 90s kids out there).

So what is a credit score?

Your credit score is basically your financial resume. Most of your financial life is reported to the three major credit score bureaus (Transunion, Experian, Equifax) and they do some financial and mathematical, wizardry like Oz behind the curtain, to pump out a 3-digit score that is indicative of how reliable you are as a borrower of money (such as credit card debt, auto loans, mortgages, and those pesky student loans).
This 3-digit score ranges from about 300 all the way up to 850. The scores themselves don’t mean much, but the way companies interpret them does. To give you an idea of what to shoot for, the average score in America is 692 —so you want to reach that mark or higher.
Climbing up the proverbial ladder, 700 is a decent score, between 720 and 750 is a solid score that will get you some of the better deals and interest rates out there, and anything over 750 means creditors will be chomping at the bit to get ahold of you. These creditors (aka people who lend money) will extend you different offers for credit cards, auto loans, mortgages, etc., and the terms and cost can vary widely based on your credit score, so building it up and keeping it as high as possible is a pursuit worth chasing. High scores = better deals = pay less in interest = save more.
The scores themselves don’t mean much, but the way companies interpret them does.

good credit is your street cred

It’s not just the bank that you get your auto or home loans from that care about your credit.
Thought you nailed that job interview and the job offer is coming by the end of the week? Think again. Increasingly, employers are looking at your credit score to determine whether or not they think you will be a “reliable” employee.
Whether or not this is right or fair (hint: it’s neither of these), many places will check before offering you the job, so a higher score can mean you get the job over the person sitting next to you in line to interview.
Don't forget that landlords and apartment leasing agencies are getting in the game by taking a peek at your score before offering you the lease on your new bachelorette pad. A not-so-hot score might leave you looking elsewhere.

The “Magic” Behind the Score

“Alright, I get it. My score is important, but how is it calculated?”
Glad you asked! Your score is a mish-mash of six different factors and each of these has a different weight and level of importance:
  1.  First up, the single most important factor is your payment history. Moral of the story: never miss a payment. It can tank your score 50 - 100 points immediately and take months (or more) to rebuild. If you think you might miss a payment, set up auto-payments so you never miss a payment again.
  2. Second, your credit utilization ratio should be at or below around 30 - 35% of your available credit. This simply means that if you have a credit card with a limit of $2,000, then your balance should be at or below around $600. This applies even if you pay off your credit card in full each month because your balance is often reported before you make your payment, so try to stay below 30% at all times. This shows you’re able to show a little restraint (the bureaus dig it). The four other factors are less important, but still matter:
  3. Keep hard inquiries at or below two—the best way to do this is to make sure you just say “NO” when Nordstrom’s, Macy’s, and all those other companies ask you if you want to sign up for their store card. These hard inquiries do go away after two years, but still try to avoid applying for tons of credit and always ask if the company is going to do a soft (doesn’t impact score) or a hard inquiry (could impact score),
  4. Age of credit history, the older the better, but there isn’t much to do here other than let time pass
  5. Number and types of accounts. Counterintuitively, the more accounts you have, generally the better. In terms of types, student loans are often called “good debt” (yes, it exists) because they establish a line of credit early and for a good cause. So, take heart! Those student loans are good for something. Other types are revolving accounts (credit cards and that Target retail card), personal loans, mortgages, etc.
  6. Lastly, public records. Not many people have these, but if you do, they can tank your score. These are generally bankruptcies or arrears and are pretty uncommon. 
High scores = better deals = pay less in interest = save more.
By paying attention to these six factors, you are essentially putting up a credit score shield to make sure that the Credit Score Oz doesn’t have a reason behind the curtain to lower your score. There isn’t a perfect way to figure out exactly what your score is, no one really knows how it is calculated (except for FICO, the creators), but you can get a sense of how your score will move over time by paying attention to it regularly.

you have to actively Build a good credit Score

If you don’t already have lines of credit like student loans or credit cards, your first line of credit could require a co-signer, which is someone, like a parent, who has a proven track record of using credit. Once you make a bunch of payments on your debt, you’ll start to establish a score and more detailed credit report. To improve that score, the best thing you can do is make on time payments consistently. That will assure those big bureaus that you’re responsible with cash money and you’ll see your score improve.
The next thing to do it diversify. There are two kinds of debt, installment and revolving.  Revolving is just what it sounds like, it’s the type of debt that comes and goes regularly. The best example of revolving debt is your credit card - one month you might buy that flight to California and the next month you’re paying it off. Round and round we go with revolving debt. Credit cards often have a minimum payment that you have to make to be considered on-time with your payment- PAY THAT (and hopefully all of it each month, don’t get behind)! At the very least, this will ensure your payments are being reported to the agencies so your score can build.

The next type of debt is installment, you can think of this as lump sum. A student loan, car loan or mortgage fall into these categories - you get a large amount up front then pay it off over time. Again, PAY THESE on time to make sure you aren’t sabotaging your score and your future.

Check Your Score. Recheck. recheck...

If you are someone that might say, “I think my score was...but I haven’t checked in a while.” then you need to head to Credit Karma right now. Credit Karma is a truly free website where you can get your score and your report. There’s no trick about it being free forever because, like Facebook, they make money by displaying ads, so it’s free to us consumers to use. Watch out for other sites that claim to be free because they most likely are not. A good gut check is to run away if they ever ask for your payment information.
Another way to get your report (sorry, no score included unless you want to buy it) is annualcreditreport.com and this site is the only one that the federal government actually endorses - it's also free. You want to make sure all the information on your report is accurate including your name and address information, lines of credit, and payment history since upwards of 50% of reports have been shown to have errors. If you have an error, you are legally allowed to contest this and you can find email templates on the internet to fill out and send in to the credit bureau addressing the error to have them rectify it. They generally must respond to you in 30 days, so be on the lookout.
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